Car buyers may be tempted to take advantage of six-year car loans, a relatively new development in car financing. But the
Consumer Bankers Association warns against it.
“It lets the consumer buy more car, but it will cost more because of the finance charges,” said Kenneth Reed, a spokesman for the Washington-based association, which focuses on retail banking issues.
Despite this, 18 percent of new car buyers in 1997 opted for a six-year loan — a 10 percent increase over 1993. That was the conclusion of a study completed for the association by The Consumer Lending Center of Excellence of KPMG Peat Marwick LLP headquartered in St. Louis.
Cars lasting longer
One reason loans are being issued for a longer term is that the average life of a car has risen to 13 years during the last decade, said Rodney Barr, a KPMG partner who conducted the study.
“Lenders feel there is less risk going out that far on a new car,” Barr said, adding that seven- and even eight-year leases are being made on sport utility type vehicles that are considered to be even more durable.
But auto loan analyst Art Spinella of Bandon, Ore., says the only real winners in six-year loans are the lenders who make 7 million new-car loans annually.
“The car may be fine over a longer period, but the buyer will wind up paying for brakes, tires, major tune ups and more loan interest as well,” said Spinella, vice president of CNW, a consumer research organization.
While auto dealers will help car buyers take out a longer auto loan, most would prefer them to stick to three-year loans. “This brings them back more often to buy another car,” Spinella said.
Average customer borrows $21,000
Today, the average consumer borrows $21,000 at a 7.5 percent interest rate to finance a new car, Spinella said. On a three-year loan, the monthly payment is $653; on a four-year, $507; on a five-year, $420; and on a six-year, $350.
The difference between a three- and six-year monthly payment is $303. “This sounds nice, but the interest on the longer loan will eat you alive,” Spinella said, adding that too many people are “clueless” when it comes to determining the true cost of a car loan.
Because the average car buyer wants to trade every 39 months, those taking longer loans are going be unhappy if they trade early.
“The buyer will find he owes more money than the car is worth on the used car market,” he said, making him “upside down” in the loan.
Because a 6-year-old car is worth only 25 percent of its new car price, he said, “It makes no sense to pay interest on something that will be worth so little when it comes time to sell.”